Taxing Europe's frayed tempers
As Greek tensions flame over Christine Lagarde's calls for citizens to pay more tax, fears about Spain's banking system are also raging.
In a hard-hitting interview with The Guardian newspaper, Lagarde made little effort to disguise her exasperation with crisis-plagued Athens.
Asked whether she had sympathy for Greeks who now faced cutbacks in essential public services, Lagarde lashed out: "Do you know what? As far as Athens is concerned, I also think about all those people who are trying to escape tax all the time. All these people in Greece who are trying to escape tax."
She added that it was now time for Greeks to help themselves "by all paying their tax."
Her comments sparked an outcry in Greece, with the head of the socialist Pasok party, Evangelos Venizelos, accusing her of having "humiliated” the Greek people.
"No one can humiliate the Greek people in this crisis period, and I say that particularly with respect to Madame Lagarde”, he said in a speech on Saturday night. He called on her to "reconsider” her comments.
After her Facebook page was flooded with thousands of critical comments, Lagarde posted a reply, saying she was "very sympathetic to the Greek people and the challenges they are facing”, adding that it was important for Greeks to share the burden. Her response, however, did little to stem the surging tide of Greek anger.
Meanwhile, Spanish banks will remain in the spotlight after the troubled lender Bankia said that it would ask the Spanish government to pump in €19 billion ($24 billion) to help it cover the massive losses it faces on its huge property portfolio.
The latest capital injection comes on top of the €4.5 billion loan which the Spanish government converted into equity in Bankia, and brings the size of the bank’s bailout to €23.5 billion – a record level for the Spanish financial sector.
Last week, Spanish Finance Minister Luis de Guindos said the government would give Bankia as much money as it needed. The Spanish government has little choice but to prop up Bankia, which is the country’s third largest bank in terms of assets, because there are fears that its collapse would contaminate the entire Spanish banking sector.
But the size of the bailout – which is much larger than markets had expected – is fuelling worries about the health of other Spanish banks, which are also burdened with billions of euros of toxic property loans.
There is also concern that Madrid, which is under intense pressure to reduce its bloated budget deficit, lacks the cash to recapitalise the country’s troubled banks.
Spain's state-backed Fund for Orderly Bank Restructuring, known as FROB, only has €5.3 billion left to support ailing banks. One possibility is for FROB to issue more debt, but the steep rise in Spain’s borrowing costs makes this an expensive option.
On the weekend, a Spanish government spokesman said that instead of injecting cash, the Spanish government could issue Bankia debt certificates issued by the Spanish Treasury or by FROB in exchange for equity. Bankia could then borrow from the European Central Bank, using these certificates as collateral.
Meanwhile, investors are dumping Spanish bonds, as they worry about the frail health of the Spanish banks, and the financial woes of many of Spain’s regions. As a result, Spanish 10-year bond yields climbed to 6.3 per cent at the end of last week, a level that is generally considered to be unsustainable.